U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[x]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
Commission file number 0-19721
THE CLASSICA GROUP, INC.
(Exact name of small business issuer as specified in its charter)
New York 13-3413467
(State or other jurisdiction (IRS Employer identification no.)
of incorporation or organization)
1835 Swarthmore Avenue, Lakewood, New Jersey 08701
(Address of principal executive offices)
(732) 363-3800
(Issuer's telephone number)
---------------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ...X..No.....
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d)of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes .......No .......
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares outstanding of each of the issuer's classes of common
equity as of March 31, 2002
Title of Each Class Number of Shares Outstanding
Common Stock, $.001 par value per share 3,026,211
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
March 31, 2002
ASSETS
------------
Current Assets:
Cash and cash equivalents $119,522
Accounts receivable 333,876
Inventories 378,402
Prepaid expenses and other current assets 81,086
---------------
Total current assets 912,886
Property and equipment, net 924,534
Intangible assets, net 1,523,675
Other asets 412,728
Goodwill 157,500
---------------
TOTAL ASSETS $3,931,323
===============
See notes to the consolidated financial statements(Unaudited).
2
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited) (continued)
March 31, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------
LIABILITIES
-----------------
Current Liabilities:
Current portion of long-term debt $91,800
Accounts payable 1,328,912
Accrued expenses 80,136
---------------
Total current liabilities 1,500,848
Long-term debt, less current portion 79,634
---------------
Total liabilities 1,580,482
---------------
STOCKHOLDERS' EQUITY
-----------------------------------
Preferred stock
Class A participating convertible preferred shares,
$1 par value, stated at liquidation value,
authorized 200 shares of which 16.5 shares are issued
and outstanding. 397,898
Common stock
Par value $.001 - 25,000,000 shares authorized,
3,026,211 shares issued and outstanding 3,026
Additional paid-in-capital 3,955,572
Accumulated deficit (2,005,655)
---------------
Total Stockholders' Equity 2,350,841
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,931,323
===============
See notes to the consolidated financial statements (Unaudited).
3
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2002 and 2001
March 31,
2002 2001
-------------------------------
Net sales $ 1,776,240 $ 1,622,472
Cost of sales 1,330,256 1,195,377
-------------------------------
Gross profit 445,984 427,095
Selling, general and administrative expenses 556,329 368,666
-------------------------------
Income (loss) from operations (110,345) 58,429
Interest expense - net 44,257 36,822
-------------------------------
Income (loss) from continuing operations (154,602) 21,607
Loss from discontinued operations 0 (126,984)
-------------------------------
Net loss $ (154,602) $ (105,377)
===============================
EARNINGS PER COMMON SHARE
BASIC & DILUTED
Income (loss) from continuing operations $ (0.06) $ 0.01
Loss from discontinued operations - (0.07)
-------------------------------
Net loss $ (0.06) $ (0.06)
===============================
Weighted average shares outstanding,
basis and diluted 2,747,050 1,848,118
See notes to the consolidated financial statements (Unaudited).
4
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2002 and 2001
March 31,
2002 2001
-------------------------
Cash flows from operating activities:
Net income (loss) continuing operations $ (154,602) $ 21,607
(Loss) from discontinued operations - (126,984)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 79,553 56,963
(Increase) decrease in accounts receivable (178,484) 57,076
Decrease in inventories 68,251 29,862
(Increase) decrease in prepaid expenses
and other assets (24,022) 43,139
Increase in accounts payable and accrued expenses 62,665 19,579
-------------------------
Net cash provided by (used in)
operating activities (146,639) 101,242
-------------------------
Cash flows from investing activities:
Purchase of fixed assets (84,937) (34,705)
Increase in other assets (7,172) -
Increase in intangible assets - (37,111)
Increase in net assets discontinued operations - (5,419)
-------------------------
Net cash (used in) investing activities (92,109) (77,235)
-------------------------
Cash flows from financing activities:
Repayment of long-term debt (22,727) (8,767)
Issuance of capital stock-exercise of options 280,000 -
-------------------------
Net cash provided by (used in)
financing activities 257,273 (8,767)
-------------------------
Net increase in cash and cash equivalents 18,525 15,240
Cash-discontinued operations - (30,289)
Cash and cash equivalents at beginning of period 100,997 31,104
-------------------------
Cash and cash equivalents at end of period $ 119,522 $ 16,055
=========================
Supplemental disclosure of cash flows information:
Interest paid $ 44,257 $ 36,822
=========================
See notes to the consolidated financial statements (Unaudited).
5
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 --ORGANIZATION AND BASIS OF PRESENTATION
The Classica Group, Inc. (the "Company") is a holding company and through
its Cucina Classica Italiana, Inc. ("CCI") subsidiary is a national distributor
of specialty cheeses and Italian meat products. The Company's Classica Microwave
Technologies, Inc. ("CMT") subsidiary provides solutions to serious bacterial
problems facing the food industry in addition to providing an innovative
microwave based processing system designed to maximize productivity while
reducing operating costs in food processing. A majority of the Company's
customers are food retailers and distributors.
The unaudited consolidated financial statements included herein have been
prepared by the Company in accordance with the same accounting principles
followed in the presentation of the Company's annual financial statements for
the year ended December 31, 2001 pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments that are of a normal and recurring nature and are necessary to
fairly present the financial position, results of operations, and cash flows of
the Company have been made on a consistent basis. This report should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB Annual Report for the year ended December 31, 2001.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany balances are
eliminated.
Income taxes for the interim period are based on the estimated effective
tax rate expected to be applicable for the full fiscal year. The Company has
recorded a full valuation allowance related to the deferred tax asset at March
31, 2002.
NOTE 2 -PER SHARE DATA
The per share data has been calculated using the weighted average number of
Common Shares outstanding during each period presented on both a basic and
diluted basis in accordance with SFAS 128. Outstanding options and warrants have
been excluded from the computation due to their antidilutive effect.
6
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - Property and equipment
Property and equipment are carried at cost, less accumulated depreciation
and amortization computed on a straight-line basis over the lesser of the
estimated useful lives of the assets (generally three to ten years for
equipment, furniture, and equipment and the lease term for leasehold
improvements).
Property and equipment consists of the following at March 31, 2002:
Furniture & equipment $ 1,623,496
Leasehold improvements 103,885
-------------
Total cost 1,727,381
Less accumulated depreciation and amortization (802,847)
-------------
$ 924,534
=============
NOTE 4 - Intangible Assets
Patents are amortized over their estimated useful lives, approximately 15
years. Intangible assets are reviewed for impairment whenever events or
circumstances indicate impairment might exist or at lease annually. The Company
assesses the recoverability of its assets by comparing projected undiscounted
cash flows associated with those assets against their respective carrying
amounts. Impairment, if any, is based on the excess of the carrying amount over
the fair value of those assets.
Intangible assets consist of the following at March 31, 2002:
Importing licenses $ 39,286
Patents 1,552,328
----------------
1,591,614
Accumulated amortization (67,939)
----------------
Intangible assets, net $ 1,523,675
================
NOTE 5 - Goodwill
The Company adopted SFAS No. 142 at the beginning of 2002 for goodwill
recognized in the Balance Sheet as of January 1, 2002. This standard changed the
accounting for goodwill from an amortization method to an impairment-only
approach and introduced a new model for determining impairment changes.
The new impairment model requires performance of a two-step test for
operations that have goodwill assigned to them. First, it requires the
comparison of the book value of net assets to the fair value of the related
operation. Fair values are estimated using discounted cash flows, subject to
adjustment based upon the Company's market capitalization at the date of
evaluation. If fair value is determined to be less than book, a second step is
required to be performed to compute the amount of the impairment. At March 31,
2002 the fair value of the operation exceeded the book value and, accordingly,
no impairment was indicated.
7
THE CLASSICA GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6 -- SEGMENT REPORTING
Industry segment information at March 31, 2002 and 2001 is summarized as
follows:
Total Revenue Operating Profits (Loss)
--------------------------- ----------------------
2002 2001 2002 2001
--------------------------- ----------------------
CCI $ 1,771,878 $ 1,593,287 $ 147,915 $126,356
CMT - - (163,391) (10,961)
--------------------------- ----------------------
Total Segment 1,771,878 1,593,287 (15,476) 115,395
Eliminations and other
corporate income(expenses) 4,362 29,185 (94,869) (56,966)
--------------------------- ----------------------
Consolidated $ 1,776,240 $ 1,622,472 (110,345) 58,429
===========================
Interest expense 44,257 36,822
----------------------
Income (loss) from continuing operations $ (154,602) $ 21,607
======================
Depreciation and
Capital Expenditures Amortization Expense Identifiable Assets
2002 2001 2002 2001 2002 2001
----------------------------------------------------------------
CCI $5,407 $ 30,024 $41,069 $49,048 $ 1,374,262 $1,667,137
CMT 79,530 38,069 - 527,394 34,000
Corporate - 4,681 415 7,915 2,029,667 2,390,732
Discontinued Op. - - - - 643,029
----------------------------------------------------------------
Consolidated $ 84,937 $ 34,705 $79,553 $56,963 $ 3,931,323 $4,734,898
================================================================
NOTE 7 - Discontinued Operations
December 28, 2000 the company adopted a formal plan to discontinue the
operations of its Deli King, Inc. ("Deli King") mobile catering subsidiary and
to dispose of the assets of the business segment. The operations of Deli King
ceased on March 9, 2001.
Operating results of Deli King for the three months ended March 31, 2001
are shown separately in the accompanying income statement.
Net sales of Deli King for the three months ended March 31, 2001 were
$361,157. This amount is not included in net sales in the accompanying financial
statements.
At December 31, 2001, all of the assets of Deli King, Inc. had been
disposed of or deemed to be worthless. In February 2002, Deli King, Inc. filed
for liquidation under Chapter VII in the U.S. Bankruptcy Court for the District
of New Jersey. Management believes that there are no material present or future
liabilities on the part of the Company for matters relating to Deli King, Inc.
8
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Unaudited
Financial Statements and related notes, which are contained herein.
Results of Operations for the Three Months Ended March 31, 2002 and 2001.
Net sales for the three months ended March 31, 2002 were $ 1,776,240
compared with $1,622,472 in 2001, an increase of $ 153,768, or 9.5%. Most of
this increase is the result of an increase in the sale of the imported
Galbani(R) mascarpone product that was brought in from Italy by air rather than
steamship beginning January 2, 2002. The resulting 21 days of additional shelf
life makes the product more attractive to CCI's existing customers. Further, CCI
has begun developing new business for the short shelf life imported products.
The Company generated gross profit of $445,984 or 25.1% of net sales in
2002 verses $427,095 or 26.3% of net sales in 2001. The decrease in gross profit
margin was the result of CCI's loss of gross margin on the increased business as
the result of the significantly higher freight costs resulting from bringing the
product in by air. However, with the recovery of the leisure services market the
sales of the short shelf life imported mascarpone product and other short shelf
life products should increase resulting in an increase in total profits in spite
of the lower gross margins.
Selling, general and administrative expenses were $556,329 in 2002 verses
$368,666 in 2001. This represents an increase of $187,663, an increase of 50.9%,
of which $163,391 represents start-up costs of the CMT subsidiary as compared to
$10,961 in those costs for the same period in 2001.
Income from continuing operations for the three months ended March 31, 2002
was a loss of ($154,602) versus income of $21,607 in 2001. This represents a
reduction of $176,209 due to the factors discussed above.
Interest expense was $44,257 and $36,822 for the three months ended March
31, 2002 and 2001 respectively. The increase is the result of a short-term
financing arrangement with one of CCI's vendors.
The Company reported no provision for Federal income taxes for the three
months ended March 31, 2002 and 2001, as the Company had net losses for both
periods.
9
Liquidity and Capital Resources
The Company's sources of capital include, but are not limited to, the
issuance of public or private debt, bank borrowings, capital leases and the
issuance of equity securities.
At March 31, 2002, the Company had a net worth of $2,350,841 compared to
$2,684,749 at March 31, 2001. The Company has limited requirements for capital
expenditures in the immediate future, except for the start-up of the new CMT
subsidiary for which the Company is planning a private placement. CCI's
factoring arrangement with GMAC Commercial Credit, LLC has adequate availability
to provide working capital to support sales growth in that division.
The Company utilizes capital leases for the acquisition of operating assets
at its subsidiaries when appropriate. At March 31, 2002, the Company had capital
leases with an unamortized balance of $171,434.
Management believes that the Company has sufficient working capital to meet
the needs of its current level of operations, with the exception of the
requirements of CMT.
Seasonality
The Company's businesses are subject to the effects of seasonality.
Consequently, the operating results for the quarter ended March 31, 2002 are not
necessarily indicative of results to be expected for the entire year.
Anticipated Future Growth
CMT has a unique patented and proprietary expertise in microwave processing
applications. While the technology has been in use in Europe and in Japan, with
more than 200 successful installations, it is virtually unknown beyond those
markets.
CMT plans to penetrate these new markets and generate revenues from 3
distinct sources:
>> Sales of Microwave heat processing systems.
>> Leasing of Microwave heat processing systems
>> Sales of Technical Services.
In order to facilitate sales of the company's Microwave systems, a major
campaign of communications and education will be undertaken among future users,
government regulatory agencies and food industry professionals - globally.
10
The objectives of this campaign are:
>> To introduce the company and the benefits of its
systems to the universe of future potential users
>> To gain for these technologies a high level of
recognition and acceptance.
Concurrent with the communications and education campaign, the company will
establish its direct sales force in the USA, and a network of exclusive agents
worldwide to identify, negotiate and sell its equipment to clients on a global
basis.
Leasing of Microwave heat processing systems is the company's second
channel of revenues. It has importance far beyond the actual cash-flow it will
generate, since it will be the premier marketing vehicle through which the
Company will introduce its technology to small and mid size first time users.
The program will provide these new users a low risk business opportunity to
increase their sales and profits.
It will provide CMT with a steady stream of cash in terms of leasing fees,
and a continuously replenishing source of new sales from those customers with
leased equipment who are driven by need to enlarge their manufacturing capacity.
The third revenue channel is from Technical Services. The company will
provide potential clients with access to its laboratories in the USA and Italy,
for the purpose of developing and customizing new processing applications. While
some of these services are provided free of charge as part of the marketing
efforts, other more comprehensive research and development services will be
marketed and offered to clients for fees.
The company uses its laboratories and technical staff to continuously
improve current systems, and develop next generation systems.
Beyond the efforts to sell systems to food manufacturers, the company will
market itself and its capabilities through partnerships with engineering design
companies, and with manufacturers of complimentary equipment, to provide future
clients with "Total Delivered Solutions".
CCI is continually seeking to expand its product line by either producing
or importing new products. In 2002 CCI will undertake a marketing project to
determine if there is a market for Galbani's short shelf life products, such as
fresh mozzarella, in the United States. In addition, with a view toward
decreasing its dependence on the food service industry, CCI has been studying
the packaging of its products to make them consumer friendly for the retail
market. A new retail shipper / display for the 3-pack Bel Paese process cheese
spread was introduced at the end of 2001.
Forward Looking Statements
The matters discussed in this Item 2 may contain forward-looking statements
that involve risk and uncertainties. The forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially due to a variety of
factors, including without limitation the presence of competitors with broader
product lines and greater financial resources; intellectual property rights and
litigation, needs of liquidity; and the other risks detailed from time to time
in the Company's reports filed with the Securities and Exchange Commission.
11
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
None
(b) Reports filed on Form 8K
None
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf the
undersigned thereunto duly authorized
THE CLASSICA GROUP, INC.
------------------------
(Registrant)
Date: May 1, 2002 By: /s/ Scott G. Halperin
---------------------
Scott G. Halperin
Chairman
Chief Executive Officer
Date: May 1, 2002 By: /s/ Bernard F. Lillis, Jr.
--------------------------
Bernard F. Lillis, Jr.
Chief Financial Officer
Principal Accounting Officer
Treasurer
13